Credit Tightening for Commercial Property Sector

Australia’s commercial property sector is finding it harder to access capital from banks as tightening measures introduced by regulatory bodies last year begin to take effect.

The sale of the office tower at 333 Adelaide Street in Brisbane owned by the Australian Workers Union fell through earlier this week when financiers withdrew their support, in a sign that lending conditions are worsening for commercial property deals.

In a letter addressed to investors the purchaser directly imputed the scuppering of the deal to restricted access to debt.

“Debt has proven difficult, with debt market conditions worsening since we started dialogue with the banks,” said the purchaser.

Last year the Australian Prudential Regulation Authority announced that growth in property lending would be kept within 10 per cent as part of efforts to cool the country’s overheating real estate markets.

APRA and the Australian Securities and Investments Commission dialled up lending requirements and funding costs in the second half of last year, with interest-only loans by banks confined to those borrowers capable of repaying both interest and principal at annual interest rates in excess of 7 per cent.

The impact of the dampening measures was already evident in some areas by the end of last year, with new loans to property investors in the December quarter dropping 12 per cent to $29 billion from $32.9 billion in the September quarter, as well as plunging 25 per cent year-on-year compared to the $38.7 billion issued in the final quarter of 2014.

The new interest-only loans also fell in the December quarter to $36.3 billion compared to $40.8 billion for the corresponding period in 2014.

While APRA data indicates that bank exposure to commercial property reached record levels in the December quarter, rising to $5.46 billion to $244 billion, observers contend that lag in the data and it’s only a matter of time before its figures fall into line with other real estate sectors.

Members of industry say apartment developments have already been hard hit, with lending levels significantly reduced, and even long-standing quality clients only able to secure senior debt at reduced loan to value ratios.